12-04-2021
George Lucas, Raiz Group CEO
This week saw two of the most influential Democratic lawmakers on US tax policy — Ron Wyden chair of the Senate finance committee and Richard Neal chair of the House ways and means committee — back a new plan by the Biden administration on global corporate taxation.
The US Treasury recently proposed the sweeping multilateral deal to the OECD that would include a new global minimum corporate tax rate, maybe higher than 20 per cent, aimed to discourage multinational companies from shifting profits to low-tax countries.
Under the plan, set out in a document sent to 135 countries negotiating tax reforms at the OECD, national governments could tax the global profits of roughly 100 of the biggest and most profitable multinationals, including America’s own big tech groups, based on their sales in those countries.
The OECD is said to be looking for an agreement by the middle of the year. However, once a deal is reached it still needs to be ratified by Governments involved, and the US Republicans on Capitol Hill will likely pose a roadblock, warning that the changes could harm US multinationals.
US tax code plan to close corporate loopholes
At the same time, US President Joe Biden is looking to follow through on his campaign pledge to raise corporate taxes with US tax code changes, although this may not materialise for many months.
The Made in America Tax Plan would raise the corporate tax rate from 21 to 28 percent and attempt to shut loopholes around offshoring profit. The plan, tied to President Biden’s $2 trillion infrastructure revamp, would reportedly claw back about $2 trillion in corporate profits into the US.
Biden tax reforms aimed at multinationals
The impact of these plans could have a larger impact on some sectors of the US stock market than on others like the pharmaceuticals industry, “big tech” firms, and the tech sector more generally.
In the 2019 fiscal year, US companies in these groups generally paid far lower effective rates of corporation tax than the median firm in the S&P 500.
More broadly, there is growing evidence that those with money will have to give up a large part of their wealth in coming years, especially if the Biden tax changes and OECD deals are ratified.
Another potential hit to those with money is the willingness of central banks to let inflation run higher than their targets while maintaining low interest rates, meaning the wealthy will earn a lot less on their money after correcting for inflation.
There’s also the impact of COVID-19, which should see wages rise relative to rents and interest rates.
US and European stocks reach fresh highs
Despite all this, US and European stock markets reached all-time highs last week, ending a robust week for global equities on both sides of the Atlantic.
The US S&P 500 is sitting just shy of 4,100 points, which was the median analyst target for the end of 2021 for the US equity benchmark, as calculated by Bloomberg. So, it could be said that US stocks have effectively jammed a year’s worth of gains into a little more than four months.
By contrast, Chinese stocks are not doing as well as the country’s producer price index jumped by the most in two years. The rise in factory gate prices in March shifted the focus to the possibility of rate rises and a tightening of financial conditions in China.
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